Three years ago, Children’s Hospital Oakland merged with UC San Francisco and received $50 million from Marc Benioff. Yet now it’s facing major budget cuts.

Like many children’s hospitals, the one in Oakland—which, despite its affiliation with UCSF, remains a private, not-for-profit hospital—has grown into a huge, multifaceted institution with a budget in the hundreds of millions. Philanthropy is responsible for just 4 percent of the hospital’s annual revenue, according to its most recent yearly report, covering fiscal year 2015. The rest of its revenue comes from a combination of government-sponsored plans, provider fees, supplemental funds, and investment income.

The problem is that about 70 percent of the hospital’s patients are on Medi-Cal, yet reimbursement rates are unsustainably low. According to the California Children’s Hospital Association, Obamacare greatly expanded the number of youths covered by Medi-Cal, but the state has one of the nation’s lowest Medicaid reimbursement rates. Anderson said the hospital loses about 35 cents on every dollar for Medi-Cal patients. Privately insured patients have higher reimbursement rates, yet in recent years there’s been increased competition for their business.

In 2013, Stanford’s Lucile Packard Children’s Hospital opened a 14,000-square-foot pediatric clinic in Emeryville, offering more than 10 clinical subspecialties. Stanford also partnered with Walnut Creek-based John Muir Health in 2012 to provide services in Contra Costa County.

While not pointing fingers, Anderson said the fact that other hospitals don’t serve as many Medi-Cal patients as Children’s Hospital Oakland isn’t fair. “We’re glad to serve them,” he said of indigent patients, “... but if there are other competitors in town that are not taking their fair share, that can be very devastating financially to us.”

Increased competition in pediatric care is happening all over the country. Higher reimbursement rates for complex pediatric specialties are attracting more providers to the field, and “megamergers” are allowing general hospitals to get into the pediatric subspecialist game, according to a 2015 article in industry publication Modern Healthcare.

And now privately insured patients make up a smaller percentage of Children’s Hospital Oakland’s revenue, having decreased from 32 percent in 2011 to 29 percent in fiscal year 2015.

While competition for privately insured patients grows, children’s hospitals nationwide are also facing higher costs of care and dwindling demand for inpatient services. According to the health care consultancy firm Sg2, inpatient discharges in the next decade are projected to decline nationally by 4 percent, while outpatient services are expected to grow by 7 percent. At Children’s Hospital Oakland, inpatient admissions declined from 11,010 in 2010 to 10,815 in 2015. Outpatient clinic visits, on the other hand, grew from 219,721 to 263,585 in the same time period.

“The good news is kids are getting healthier,” Anderson said. Hospitals are also discharging patients sooner, patients are receiving treatments at home, and preventative care became incentivized under the Obama administration, he added. But this isn’t so great for the hospital’s finances because insurance companies have higher reimbursement rates for inpatient services.

Thus, partnering with a larger institution in order to consolidate operations and offer more services seemed like a viable solution. Initially, the hospital considered affiliating with Lucile Packard Children’s Hospital Stanford, but, according to then-Children’s CEO Lubin, UCSF was ultimately seen as a better fit. “We both have a major public mission that’s very aligned—to serve all children regardless of ability to pay,” Lubin explained to the East Bay Times.

In a 2016 article in Modern Healthcare, however, Stanford Children’s Health CEO Christopher Dawes said Packard ultimately decided the merger with Children’s was too expensive.

Although Children’s remains separately licensed, its operations are deeply entwined with UC San Francisco. Children’s budget has to be approved by UCSF and by Children’s board, whose members also include UCSF employees. Those employees include Mark Laret, president and CEO of UCSF Health, and Anderson, who, in addition to being president of the two hospitals, is also senior vice president of children’s services for UCSF Health. Children’s Hospital Oakland’s Chief Medical Officer, David Durand, is also employed by UCSF, as is joint Chief Financial Officer Robert Fries. (Chief Operating Officer Richard DeCarlo, another UCSF employee, stepped down in May.)

Some wonder if UCSF’s leadership role in the Oakland hospital’s finances constitutes a conflict of interest.

Although affiliating with UCSF was supposed to improve Children’s Hospital’s finances, it’s not entirely clear whether it has.

For example, as part of the affiliation, pediatric subspecialty groups in Oakland and San Francisco are combining—a move designed to increase efficiency but, in some cases, appearing to increase costs. “The vision for integration is we have one program delivering essentially the same services in multiple locations by the same team,” explained Durand.

But once the groups integrate, Oakland physicians become part of UCSF faculty, and in some cases this is more expensive. Durand said this has to do with cost structures under the university and differences in overhead, payer rates, and the way cash flows.

Elliott Vichinsky, division chief of hematology oncology at Children’s Hospital Oakland, said the integration has added an “enormous amount of extra work” to his division. Whereas before certain decisions could be made quickly and efficiently, “now there are layers of people before I can get anything done,” he said.

While acknowledging some of these extra expenses, Durand said the hospital is also purchasing something different from the university—a broader training and research enterprise. “To some extent the cost is different, the revenue is different, the services that we’re contracting with to some extent is substantially different,” he said. “It’s a more nuanced issue than just are we paying some extra level of overhead to the university.”

And Anderson contends that the claim that the affiliation has hurt the Oakland hospital financially is “a complete myth.”

“Oakland as a freestanding campus would have been in even deeper fiscal crises if it hadn’t been for the affiliation,” he argued. He said UCSF helped bring in monies that Oakland wouldn’t have received otherwise, including through philanthropy and “intergovernmental transfers.”

“There is indeed strength in scale,” he said.

But by its own numbers, the Oakland hospital has had larger deficits since the affiliation. For example, with the exception of fiscal year 2015, when there was a surplus of $56.1 million, every year since the affiliation has shown a net loss. In calendar year 2014, that amounted to $11.3 million, in fiscal year 2016 it leaped to $72.7 million, and in the first three months of fiscal year 2017 (from July to September in 2016), the loss from operations was $11.4 million.

Before the affiliation, from 2011 to 2013, the hospital showed surpluses. (Although in 2008 the hospital laid off 84 medical staffers as a result of $60 million in losses, according to the San Francisco Chronicle.)